Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Expeditors International of Washington, Inc.'s (NASDAQ:EXPD) P/E ratio to inform your assessment of the investment opportunity. Expeditors International of Washington has a P/E ratio of 20.15, based on the last twelve months. That is equivalent to an earnings yield of about 5.0%.
How Do I Calculate Expeditors International of Washington's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Expeditors International of Washington:
P/E of 20.15 = $74.29 ÷ $3.69 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does Expeditors International of Washington's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Expeditors International of Washington has a lower P/E than the average (22.5) in the logistics industry classification.
This suggests that market participants think Expeditors International of Washington will underperform other companies in its industry. Since the market seems unimpressed with Expeditors International of Washington, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Expeditors International of Washington increased earnings per share by an impressive 16% over the last twelve months. And it has bolstered its earnings per share by 16% per year over the last five years. With that performance, you might expect an above average P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Is Debt Impacting Expeditors International of Washington's P/E?
Expeditors International of Washington has net cash of US$1.1b. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Expeditors International of Washington's P/E Ratio
Expeditors International of Washington's P/E is 20.2 which is above average (17.8) in its market. Its strong balance sheet gives the company plenty of resources for extra growth, and it has already proven it can grow. Therefore it seems reasonable that the market would have relatively high expectations of the company
When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Expeditors International of Washington may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.